The View From 1776

There is every reason to suspect that the charges against Goldman Sachs are little more than a political ploy by the administration to shift attention away from its own financial improvidence and to add impetus to its proposed regulatory strangulation of the banking business..  Right or wrong, however, the SEC’s action questions Goldman Sachs’s reputation for probity.

In many respects the frothy nature of Wall Street securities dealings leading to the current crisis are reminiscent of the mid-19th century marketing of canal-building and railroad-building securities that financed the nation’s rapid industrial and agricultural growth from the 1820s until the 1880s.

During that period, far too many speculative financial deals were marketed by Wall Street banks, deals in which securities buyers often lost their money.  It was a time when bank notes issued as currency by banks all over the nation were equally varying in soundness. 

In the 1880s, two bankers imposed a higher standard of fiduciary responsibility.  Jacob Schiff at Kuhn Loeb and J. P. Morgan at his eponymous firm endeavored never to market securities or to finance deals that had not been subjected to their judgment of financial soundness. 

Schiff, for example, would not handle a purely speculative financing.  He insisted upon traveling along the route for the proposed railroad to determine that sufficient population and economic development already existed to provide freight revenues sufficient to support debt service on the contemplated security issue.  By the time of the First World War, Kuhn Loeb’s reputation for responsible judgment placed the firm in the front ranks heading sale of Treasury bonds to finance our entry into the conflict.

Morgan, from his earliest banking days had exhibited superb business judgment.  Finding that they could trust both his honesty and business acumen, European banks, particularly in London, then the financial capital of the world, made J. P. Morgan and Co. their principal agent for dealings in the United States.

Ironically, Goldman Sachs has carefully cultivated the same ethic and has enjoyed a superior reputation for sound judgment and honesty.